When it comes to insider trading, the cover up can be worse than the crime

Sunday

Jul 20, 2014 at 6:00 AM

By Peter S. Cohan WALL & MAIN

A recent insider trading case brings to mind what led former president Richard M. Nixon to resign about 40 years ago — It's not the crime, it's the cover up.

If you recall, there was a break in at the Democratic National Committee's offices at the Watergate office complex in Washington on June, 17 1972. Evidence emerged that Mr. Nixon had been trying to cover up the truth of his involvement leading to a near-certain impeachment in the House and conviction in the Senate. On August 9, 1974, Mr. Nixon resigned.

Here's a summary of the insider trading case: On July 11, the Securities and Exchange Commission published a civil indictment against seven buddies — six of whom were fellow golfers — whom it alleges used information from an unnamed executive at Devens power technology company, AMSC, to make $554,243 in illegally gained profits or avoided losses between 2009 and 2011.

What does this have to do with Mr. Nixon's resignation? While the government wants all of these seven defendants to disgorge their gains and pay interest and penalties, it has singled out two of them for criminal penalties. And the one who is in the most trouble is a lawyer who allegedly lied to the Federal Bureau of Investigation about his involvement.

The two defendants with criminal indictments are Eric McPhail, 41, of Waltham — who was friends with the AMSC executive and allegedly traded on AMSC's pending earnings announcements and other material information before the company released the information — and Douglas Parigian, 55, a Lowell attorney.

The executive might have agreed to talk to the SEC in exchange for anonymity. John Mulvaney, director at Boston accounting firm CBIZ Tofias, told Boston Business Journal, "The AMSC executive is probably cooperating with the investigation, which is why he hasn't been named."

In a July 12 call with me, Mr. Mulvaney speculated that the SEC learned of the insider trading from someone who tipped off the agency or from its surveillance program. As Mr. Mulvaney explained, "If a stock goes up or down 10 percent in a day, the SEC will look at accounts that traded the shares to see whether there was anything unusual about any account's trading patterns. If so, the SEC can subpoena information from the account holders — including emails. Perhaps that what the SEC did to discover the participants in this case."

This is not the first time AMSC has been linked to insider trading. For example, in March 2011, a major customer, Sinovel Wind Group Co. of Beijing, failed to pay for $100 million in past shipments from American Superconductor and was refusing to receive $700 million more in orders.

In August 2013, the SEC filed a civil complaint accusing Joseph M. Tocci, former AMSC assistant treasurer, of buying put options — securities that rise in value if a company's stock goes down — on AMSC after he learned in March 2011 about the Sinovel problems.

Mr. Tocci pled guilty to criminal securities fraud and paid $170,000 — the $82,439 profit he made after April 5 when AMSC announced the Sinovel news causing its shares to dive 42 percent (plus interest and a fine) — to settle separate civil charges of insider trading, according to The Boston Globe.

Indeed it was this same Sinovel news that resulted in the biggest of the five financial paydays earned by the seven buddies, according to the SEC complaint. Two of the seven hauled in $469,810 — about 85 percent of the AMSC Seven's alleged insider trading gains. Specifically, the SEC complaint alleges that "[Mr.] Parigian made profits and avoided losses of $278,289, while Jamie Meadows of Springfield made profits of $191,521."

The SEC complaint paints a clear picture of how these two made their gains over the course of six days. At about 9 a.m. on March 31, the AMSC executive learned that Sinovel would not be paying for what it had ordered — costing what the executive estimated was $890,000 in the after-tax value of his AMSC stock. At about 6 p.m. on Friday April 1 the executive went to a bar with Mr. McPhail and told him that as a result of "a big problem at AMSC, the executive stood to lose a lot of money, would be unable to retire early, and instead would have to continue working for a long time," alleged the SEC complaint.

Over the weekend, Mr. McPhail called Mr. Parigian and Mr. Meadows. The SEC complaint alleges that Mr. Parigian and Mr. Meadows both bet on a drop in AMSC stock after talking with Mr. McPhail.

Mr. McPhail called Mr. Parigian from the bar that Friday evening at 8:13 p.m. and about 10 minutes later Mr. Parigian called his broker and found out that he could trade options in his account.

Mr. Parigian started his day by buying 238 AMSC put options that expired in April or May 2011 and had strike prices ranging from $21 to $23, according to the SEC complaint.

He also sold his 1,100 shares at about $24.31 generating $26,737 in proceeds. On April 5, Mr. Parigian added 92 more put options to his bet on an AMSC decline.

After the market closed that day, AMSC released the bad news about Sinovel. Once markets opened on April 6, AMSC shares plunged 42 percent — from $24.88 the day before to $14.47 — yielding those hefty gains for Mr. Parigian and Mr. Meadows.

Mr. McPhail and Mr. Parigian each face counts of conspiracy to commit offenses against the United States and securities fraud. Moreover, Mr. Parigian faces a false statements charge for telling the FBI on May 10, 2012, that "He did not receive stock tips or other inside information regarding [AMSC], he did not know anybody else who invested in AMSC stock, and he did not know anyone who worked for AMSC when in fact, as he both knew and believed at the time, each of those statements was false," according to the complaint.

If convicted on this last charge, Mr. Parigian is likely to suffer a nasty sting from his efforts to cover up his involvement in the AMSC seven.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.

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